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ISDA plans to embrace the late 20th Century (for Notices)

Often referred to as “the most important contract in the world”, the primary purpose of the ISDA MA is to allow close-out with netting. While almost innumerable legal opinions exist to give some comfort to netting, the actual mechanics of close-out have been long due a major overhaul. The 2002 update to the ISDA MA rushed to keep up with the blistering pace of technology advance by allowing fax machines and electronic message delivery to be used as a close-out notice delivery mechanism. Unfortunately, a 2011 High Court case– Greenclose Ltd v National Westminster Bank PLC 2014 EHWC 1156 (CH)– clarified that email did not constitute a form of electronic message delivery in the context of the 1992 ISDA MA. This “clarification” still prevails, counterparties should be sure that notice by email will not effect legal notice under a 1992 ISDA, untested legal questions remain as to email delivery and reception under the 2002 ISDA; leaving the unenviable choice of physical delivery or fax. Other options such as delivery by SWIFT are operationally inoperable or using Telex, which would require purchase of at least two machines from a quite obscure museum and delivery of one to the counterparty.

Delivery of notices is a consequential matter. The ISDA MA contains express terms as to notice delivery, these terms are inimical to implication. If the notice is not validly delivered according to the exact term of the contract, it will have no legal effect. Note that a  recent case- Macquarie Bank Ltd v Phelan Energy Group Ltd [2022] EWHC 2616 Comm) does allow for inaccuracies in the notice, but not for failings in its service. While bank and counterparty failures often occur as single events, they often tend to cluster, sometimes leading to a degree of panic and perhaps less than ideal execution of notice provisions. In other words, if something can go wrong i.e. notice addresses are out of date- they will go wrong. Fax machines are few and delivery to a central reception for multiple firms (or even facing a locked door) will not cut it. In summary, having to deliver notices by the technological equivalent of smoke signals does little to mitigate what is by definition a critical situation.

ISDA are in the early, if already late, stages of preparing a solution to the problem. This will come in the form a central notices electronic hub. ISDA documentation will be amended to repoint to the hub, delivery to which will be legally effective. Successful delivery of this innovation will require amendment to the Notices clause. Almost inevitably, the large proportion of such amendment will be via a forthcoming Protocol. As always there will be a significant number of counterparties who are unwilling to adhere to yet another Protocol. However, the potential benefits of this initiative are clear and have been pressing for some time. The ISDA initiative is certainly to be supported; however it is likely that an appreciable amount of the consequent amendments will need to be by bilateral negotiation.

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